Paying for Innovation, Experimentation, and Success (John Locke Foundation)

By Joseph Coletti

A few years ago, the chief of staff for the governor of another state excitedly told his brother about the state’s new approach to contracting that made national news. “Our plan is to only pay if the program works,” he said.  Incredulous, his brother asked, “How do you pay for things now?”

Governments typically pay first for programs and occasionally ask questions to determine results later. For big and urgent needs, policymakers create programs and fund them permanently based on some expectation of costs. For smaller needs, they create pilot programs with temporary funding. They can also create competitive grant funds for agencies to distribute to private programs based on established criteria, usually procedural, but lawmakers can and do earmark funds when they choose.

For example, the Senate and House both have provisions in their budgets to earmark $700,000 in federal funds over two years through a competitive block grant program in the Department of Health and Human Services to Big Brothers Big Sisters, which helps at-risk youth throughout North Carolina, and a total of $6.4 million to TROSA, a residential substance abuse recovery program. Each group does great work and receives generous community support. TROSA had an operating budget of $17 million in 2015. Big Brothers Big Sisters had combined revenues of more than $5 million in 2015. Although both organizations have proven effective, the budget provisions are not contingent on their ability to continue achieving results. Given the quality of their work, does it make sense to exempt $7.1 million of $8.4 million from a competitive process?

Both Senate and House would also increase state funding for Nurse-Family Partnership (NFP), which improves parenting skills and child health with nurse visits to homes of new and expecting parents. NFP would receive $2.3 million each of the next two years under the Senate provision and $4.2 million per year from the House to expand its reach in North Carolina. The program has proven effective in multiple places and received support from the Duke Endowment.

Former South Carolina Governor Nikki Haley worked with the Duke Endowment, the federal government, private investors, and an evaluation team at Duke University to make NFP available in more communities around South Carolina through a pay for success (PFS) contract, also called a social impact bond. The PFS contract makes state payment contingent on the program hitting benchmarks that demonstrate it is successful in those new communities.

PFS contracts were first tried in the U.K. in 2010 and had gained traction over time. Fourteen projects have launched in the U.S. and six of them in 2016. City and county governments have been more active than states. A number of organizations responded to a 2015 request for information to explore options for PFS contracts in North Carolina, but none gained traction at the time.

PFS contracts provide a method and a reason to quantify projected program results. Once quantified, results can be monetized taking into account concurrent savings, future benefits, and the importance of those outcomes. Legislators could start with the three proven programs mentioned above—TROSA, Big Brothers Big Sisters, and Nurse-Family Partnership. These are clearly valuable and valued initiatives. Existing PFS contracts have more commonly targeted workforce development, housing, health, and criminal justice programs. Initial contracts would provide expertise and templates that make later contracts less costly to develop.

To ensure that these contracts do not expand government in unforeseen ways, lawmakers could set aside money that would otherwise pay for current costs of pilot projects in a reserve fund to cover future costs of PFS contracts. If a project failed to meet its objectives, the money would either remain in reserve or revert to the General Fund.

The question for policymakers is, “What should we pay for?”

Joseph Coletti

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues.